Credit Rating Methodology

Credit Rating Methodology

Rating credit worthiness, is the process of an impartial, fair classification and evaluation of a firm’s ability to repay a loan, riskiness of the business itself, determining the repayment or the risk of unfulfilled principal, interest or similar liabilities due date of capital market instruments representing indebtedness.

Rating is an important instrument to guide the market players. Investors direct their investments according to risk categories established by rating firms.

The ratings classification is usually transformed to internationally known symbols in order to develop uniformity among countries. Kobirate’s rating symbols are also constituted accordingly.

Credit worthiness rating methodology of Kobirate International Credit Rating and Corporate Governance Services Inc. consists of both qualitative and quantitative factors.

In Kobirate International Credit Rating and Corporate Governance Services Inc.’s credit worthiness rating;

The analyses to be made is based on, min 3-5 years operations and financial / non financial data incompliance with accounting principles determined by Turkish Accounting Standards Board approved by independent auditing companies or professionals authorized to audit under Act No:3568

Firm’s performance and all ratios derived from financial data are compared with the averages of the relevant sector in order to set a clear view on firm’s performance. Also, probable changes in firm’s business environment, in regulations, in the dynamic structure of the firm itself, in market structure are statistically made subject to sensitivity analyses.

Rating grades established by Kobirate are divided as long term and short term according to maturity.

Short term rating grades are used for liabilities less then 1 year maturity while long term rating grades are used for liabilities over 1 year maturity.

Symbols and Definitions of Long Term Grades of Kobirate


Firms and securities rated with AAA-AA-A-BBB rating grades are assessed as “Investable Grade” in market.
KRAAA means the highest credit quality of the rated borrowers and debts compared to other borrowers and debts with the highest rate of performance of financial obligations.



means the high credit quality of the rated borrowers and liabilities compared to other debts and borrowers. It means that ability to perform financial obligations is high while the possibility that is affected by sudden changes in the economic, financial managerial conditions is small.



means the credit quality higher than the average for the rated liabilities and borrowers compared to other debts and debtors. Ability to perform financial obligations is high, however it may be affected by adverse economic conditions.



means the average credit quality of the rated liabilities and borrows compared to other debts and debtors. Ability to perform financial obligations is high while risk that is affected by adverse economic conditions is high.
Firms and securities rated with BB-B-CCC-CC-C rating grades are assessed as “Speculative Grade” in market.



means credit quality below the average in respect of rated liabilities and borrowers compared to other debts and debtors. It is highly reliable to economic and financial conditions in performance of financial obligations.



means the weak credit quality of the rated borrows and debts compared to other debts and debtors. It is highly liable to economic and financial conditions in performance of financial obligations.
KR CCC means the lowest credit quality of rated borrowers and debts compared to other debts and debtors. It is rather below the category in which investment may be made at risk and economic, sector and financial conditions must recover for it to perform its financial obligations.
KR CC means insufficient credit quality for rated debtors and debts compared to other debts and debtors. Risk of default in performance of financial obligations is rather high.
KR C means the highly insufficient credit quality of the rated borrowers and debts compared to other debts and debtors. The risk is too high.
KR D Borrowers and liabilities rated in this category have failed to perform their financial obligations.


Max and Min Numeric Scores of Long Term Grade Definitions of Kobirate




KR AAA 88 – 100,0
KR AA+ 84 – 87,9
KR AA 80 – 83,9
KR AA- 76 – 79,9
KR A+ 72 – 75,9
KR A 68 – 71,9
KR A- 64 – 67,9
KR BBB+ 60 – 63,9
KR BBB 56 – 59,9
KR BBB- 52 – 55,9
KR BB+ 48 – 51,9
KR BB 44 – 47,9
KR BB- 40 – 43,9
KR B+ 36 – 39,9
KR B 32 – 35,9
KR B- 28 – 31,9
KR CCC 25 – 27,9
KR CC 22 – 24,9
KR C 20 – 21,9
KR D 0 – 19,9

Symbols and Definitions of Short Term Grades of Kobirate

Symbols and definitions of short term grades of Kobirate are defined as follows;

KR A – 1 Represents the highest credit quality of rated borrowers and debts compared to other borrowers and debts
KR A – 2 Represents a higher then the average credit quality of rated borrowers and debts compared to other borrowers and debts
KR A – 3 Represents an average credit quality of rated borrowers and debts compared to other borrowers and debts
KR B Represents a below average credit quality of rated borrowers and debts compared to other borrowers and debts
KR C Represents a speculative credit quality of rated borrowers and debts compared to other borrowers and debts
KR D Borrowers and debts rated have failed to perform their financial obligations compared debts.

The outlook descriptions of Kobirate’s long term grades applied are as follows;

With the rating grade assigned for a period of 6 months up to 2 years, Kobirate indicates the potential movement direction of the firm. By assigning an outlook, Kobirate takes changes in economical, financial, sector based and corporate conditions into account.

Positive The grade may be raised
Negative The grade may be reduced
Stable No change is expected
In course of change The grade may be raised or reduced


Types of Kobirate Rating Grades

1- International rating in terms of Foreign Exchange: Assesses the firm’s repayment ability of FX liabilities with generated FX. All country risks including convertibility are considered.

2- International rating in terms of Domestic Currency: Assesses the firm’s repayment ability of domestic currency liabilities with generated domestic currency according to international criteria. All country risks excluding convertibility are considered.

3- National rating in terms of Domestic Currency: Assesses the firm’s repayment ability of domestic currency liabilities with generated domestic currency according to national criteria. Country risks are excluded.

Rating Operations Targeted by Kobitare

A- Corporate Rating

1. Industrial and trading companies

2. Banks and financial institutions

3. Public entities

4. Municipalities

B- Issue Rating

1. Bond rating

2. Financial structuring

C- Project Rating

The Kobirate Methodology Profile (KRMP)

Kobirate Rating Methodology Profile is an important methodological element helping the model to ensure a material scoring during a specific rating process of risk factors for each debtor and operation analyzed and rating analyst / credit rating committee to reach a “final rating” by automating all determined scores described and gathered.

During the comparison analyses in KRMP’s quantitative elements;

· Quantitative elements are appraised accurate and according to its purpose,

· The impacts of seasonal and conjectural movements are taken into account,

· The reasons of changes in quantitative ratios and its importance to the firm are determined accurately,

· In assessing the ratios, the firm’s historical data are compared with the sector data.

The Accounting Standards in Corporate Credit Rating

Kobirate corporate credit rating methodology is based on the last 3-5 years financial statements approved by independent audit firms or authorized audit professionals under Act No: 3568 in compliance with the Turkish Accounting Standards Board. For the companies with shorter business life, the rating process is finalized accordingly.

Both before and after the starting of rating process and during the rating process itself, being rated firm’s accounting policies and relevant procedures including their impact to firm’s performance and the extend of its reflection is analyzed.

In order to make a robust comparison with the sector and other firms, making necessary arrangements or considering differences at the following subjects, the data obtained is made suitable for qualitative analyses.

1- Consolidation principles

2- Inventory evaluating method

3- Evaluation and depreciation methods for fixed assets

4- Recognition of revenue and expense items

5- Evaluation of cash and investments

6- Provisioning and evaluation of accounts receivables

7- Evaluation and method of intangible fixed assets

8- Retirement and severance payment liabilities

9- Other and contingency liabilities if any

Country’s Economic, Social and Political Indicators

Economic Indicators

The following economic indicators are added to Kobirate rating system (PERFECTRATE) database on monthly basis since the first release.

Turkish economic data indicators are monthly monitored since Jan 2005 and current economic indicators of Turkey in our system reached to 51.

These indicators are;

1- Monthly percentage change in PPI

2- Annual percentage change in PPI

3- Monthly percentage change in CPI

4- Annual percentage change in CPI

5- Monthly exports in mio USD

6- Monthly imports in mio USD

7- Monthly trade deficit in mio USD

8- Annual exports in mio USD

9- Annual imports in mio USD

10- Annual trade deficit in mio USD

11- Monthly current account balance in mio USD

12- Accumulative current account balance in mio USD

13- Annual current account balance in mio USD

14- Domestic borrowings in mio YTL

15- Repayment of domestic borrowings

16- Domestic borrowings stock in bio YTL

17- Interest rate of domestic borrowings

18- Monthly budget revenue in mio YTL

19- Monthly budget expenditure in mio YTL

20- Monthly budgetary balance in mio YTL

21- Accumulative budgetary balance in mio YTL

22- Real rate index (1995 = 100)

23- Monthly average of USD rate

24- Monthly average of EURO rate

25- CBT’s FX tenders, purchase and sales in mio USD (Purchase+sale-)

26- Total Deposits in bio YTL

27- Total FX in bio USD

28- Total loans in Bio YTL

29- Total consumer credits in bio YTL

30- Total credit cards in bio YTL

31- Capacity utilization rate

32- Industrial production index (1997 = 100)

33- Change percentage of industrial production index

34- Number of protested bills

35- Protested bills in mio YTL

36- Number of bad checks

37- Repayment of external debts in mio USD

38- Number of tourists in thousand

39- Tourism revenues in mio USD

40- Tourism expenditures in mio USD

41- Total purchases of foreign stock in mio USD

42- Total sales of foreign stock in mio USD

43- CBT’s rediscount rate

44- CBT’s advance rate

45- Population of the country

46- GDP

47- Annual per capita income in USD

48- Unemployment rate

49- Number of companies incorporated

50- Number of companies closed

51- Prices of gold in ounce at month ends in USD

The economic indicators data are not numerically limited to 51 in Kobirate system, it enables to keep new data while deleting the invalid ones.

FX Data

7 Fx data are transferred into the Kobirate system daily and automatically and these data is kept in our database since Jan 2006 as graphical representation. These Fx data consist of: EUR, DKK, GBP, JPY, NOK, USD and SEK

The ISE Data

Data of ISE 100, 50 and 30 indexes kept in Kobirate system for the last year are updated regularly in graphical presentation.

Sector Reports

55 sector reports issued by various individuals and organizations are available in Kobirate system and numerical improvement actions are continued.

Default Data

In this section, to guide rating experts and analysts including other employees and to be helpful during rating process, default descriptions and methods used in determining default are added to Kobirate system.

Default Description

According to Basel II notification on international capital adequacy standards published in June 2004 article no: 452, default occurs if any one or two of the below mentioned conditions realized.

a- Bank decision that a debtor is unable to repay its liabilities totally

b- The debtors’ inability to repay its liabilities towards the bank within 90 days (180 days for retail credits)

In rating models default is the main criterion to determine probability of default.

To accept a credit as a default data, the variable must be examined and the period between default and last balance sheet must be one year according to Basel II standards. The portfolio description must be made in default data. Mean default data may be different for debtors of different categories. For this reason, credit portfolio must be classified. Basel II limits can be used during this classification. In building a statistical model, especially number of default credits must be adequate. In Kobitrate, default data to form the basis of the system is going to be derived from data obtained from transactions.

Signals of Default in Repayment

The events mentioned below are mentioned as signals of default in repayment of a credit.

1- Bank’s recording credits on interest free basis,

2- Since granting of a credit line, depreciation in or writing down of a loan due to apparent deterioration in credit quality,

3- Bank’s selling and/or transferring credit liabilities due to a risk resulting an economic loss,

4- Bank’s necessary rescheduling of credit liabilities which results the banks relinquish or postponing some important financial liabilities such as principal, interest and similar operation charges of the debtor,

5- Bank’s proceeding of legal bankruptcy of the borrower,

6- The debtor’s initiation similar actions against the banking group for all credit liabilities,

7- The debtor’s declaring commercial bankruptcy,

8- Borrower’s default, the debtor’s market value falling under liabilities value

Description of Analyzing Methods in Credit Rating

In Kobirate’s corporate credit rating system, a credit rating result is reached under 3 main analyses mentioned below whether or not the firm is a manufacturer, public entity or a service industry.

1- Corporate Governance, Management Quality and Shareholders Structure Analyses,

2- Financial Risk Analyses,

3- Business Risk Analyses

Description of Corporate Governance, Management Quality and Shareholders Structure Analyses in Credit Rating

In Credit rating, Corporate Governance Rating is a system to audit whether a firm’s crystalline and accurate informing is suitable to modern corporate governance principals on management structure and styles, arrangements about shareholders and stakeholders with assigning a grade corresponding to existing situation.

Not only CMB, BRSA also set the necessary corporate governance principles to be complied with released on 01.11.2006 / 26333 dated and numbered official gazette with Bank’s Corporate Governance Principals Regulation.

In credit rating, Kobirate’s Corporate Governance Rating is realized with a system adopting CMB directives on Corporate Governance Principals identically. In this system, firms are analyzed under 4 main titles; Shareholders, Public disclosure and transparency, stakeholders and Board of Directors.

Kobirate has developed a questionnaire to evaluate firm’s management quality, shareholders structure quality and corporate governance quality as a part of its corporate credit rating.

Corporate Governance

a- Share holders

b- Public disclosure and transparency

c- Stakeholders

d- Board of Directors

Corporate governance review questionnaire is set in Kobirate rating system PERFECTRATE, and send and responded to and by the firm via Internet. Kobirate rating system automatically assigns a grade to this section. The grades are finalized by rating expert’s controls.

Management Quality

It’s developed as a questionnaire and resulted by rating expert’s analyses.

Shareholders Structure Quality

It’s developed as a questionnaire and resulted by rating expert’s analyses.

Descriptions of Financial Risk Analyses Techniques in Credit Rating

Financial risk analyses consist of correlating between items in financial statements including measurement and interpretation of these. By analyzing historical and current performance of the firm, forecasts towards future are obtained. Kobirate studies financial risk analyses under 4 subsections.

The first group of ratios is for liquidity situation of the firms which enables to analyze relationship between current assets and short term current liabilities. These ratios can be used to determine the capability to pay current liabilities and adequacy of working capital. Kobirate uses 8 ratios in this group.

Second group of ratios used in financial risk analyses are 17 financial structure ratios to determine the firm’s resource structure and capability to pay long term liabilities. In other words these ratios are used to determine whether equity capital is adequate or not, balance of liabilities to equity capital within resource structure and which kind of current or fixed assets the sources generated as equity capital are used. These ratios indicate the firm’s capability to pay its long term liabilities.

Third group of ratios used in financial risk analyses are operating ratios of the firm. Operating ratios are used to determine how efficient the assets are managed. Kobirate uses 8 ratios in this section.

The last group of ratios used in financial risk analyses is the profitability ratios of the firm. These ratios determine whether the firm had sufficient profit within the examined period. At a non profit or potential non profit environment, it’s difficult to attract capital and to finance debt. Instead, funding is facilitated easily by reliable profit even if they are periodical or fluctuating. Totally 14 profitability ratios are analyzed under 3 groups. In the first group the ratios relating with profitability and capital, in the second group the ratios relating with profitability and sales and at the last group the ratios relating with profitability and financial liabilities are set and analyzed.

The Ratio Analyses

With the ratio analyses, the relative relation of amounts in the financial statements is analyzed to find out the financial situation of the firm. It is possible to calculate many ratios in financial statements. But the aim of calculating a ratio is to reach an interpretable data. The ratios alone are far from significance. However, become meaningful when compared with other relevant ratios, previous years’ ratios and sector averages.

Definitions of Business Risk Analyses in Credit Rating

A major part of credit rating is composed of business risk analyses. In Kobirate rating methodology, business risk is finalized with the sector risk analyses of the firm it operates, including competitive power and operational analyses and business risk level is quantified.

In some special cases operational analyses is needed within business risk analyses. Where the operational analyses are a precondition for technical adequacy becomes a useful element in business risk analyses. As the most distinguished example; it’s very important in rating medicine and airway companies as human safety is a force major subject and due to this possible sudden client losses can be seen.

What kind of risks a firm faces with doing business in a special industry or fields? The important subject here is the demand expectations. What kind of improvement designates sector trends in sales and revenues? The future of the sector is the integral part of our analyses. The basic industrial features are analyzed in terms of possible impacts on growth trends.

Sector Risk

It is possible to consider sector risk as loss of income or loss of market share. They are described as changes in sector, conjectural fluctuations, being out of fashion, changes in client demands, technological changes, declining the entry barriers and facing a total financial loss due to intensified competition risks. Factors to be considered in sector risk rating are demand expansion, pricing flexibility, capital intense, research and development requirements and barriers to enter. The degree of local, regional and international economic and politic conditions must be considered for the future of the sector.

Compilation and Evaluation of Sector Financial Data

One of the most important elements in rating process is the comparison of balance sheet and income statement for the last 3 to 5 years data of the firm with the relevant sector averages. After the entry of the firm’s data to Kobirate system PERFECTRATE, the system generates 47 ratios automatically. In our database, both in national and international basis, the meanings and benchmarks of all the ratios generated are explained and also can be updated.

The second important feature of the rating system is to form a sound and continuous data and constituting sector reports to reflect the actual overview of the sector.

Our sector database consist of 13 main and 14 sub manufacturing industry data sets formed by nearly 7500 firms’ balance sheets, income statements and other relevant information renewed every year. From these data, sector structural analyses tables, liquidity ratios, financial structure ratios, turnover ratios and profitability ratios including flow statements and competitive power of each sector are generated automatically.

Sector Structural Analyses Statement

Sector structural analyses statement is a database that enables to analyze sector and firm’s asset / liability items and capital structure of balance sheets with automatically generated balance sheets and income statements of sectors. System also enables horizontal and vertical analyses of last 5 years structural analyses data.

Sector Fund Flow Statements and Sector Fund Flow Statement Analyses

These statements are standard statements designing sector fund and cash flows in detail after the balance sheet and income statement data entry of the sector. They ensure the sectors managerial and financial policies reflection to financials between 2 periods of a sector more easily.

The statements derived from analyses to present changes in firm’s financial situation are called funds flow statements.

Funds flow analyses are not only a summary of firm’s operations but also an attempt to indicate firm’s investment and financial activities. Therefore, it covers all financial changes by means of consequent year’s balance sheets. Accordingly, in a funds flow analyses, a fund concept expanded to cover all financial changes is used. Expanded fund concept, for example considers the share certificates issued to buy an asset as a funds resource and a purchased asset as a funds usage.

Funds flow analyses is a summary of funds from resources and funds used in various purposes for a specific period. A major part of this summary represents the funds obtained from income generating operations. Except funds generated from these operations, sales of assets, long term bond issues and share certificate issues can also be attributed as inflow of funds. Outflow of funds on the other hand may relate to asset purchases, bond obligations refunding or dividend payments.

Finance managers can evaluate the fund requirements of a firm for the next periods by analyzing fund flow statements of the previous fiscal periods. Fund flow statements are also very useful tools specially for medium and long term financial planning.

The Numeric Data of the Sector

Approximately 7500 firm’s balance sheets and income statements in our database have been adjusted according to inflation in 2004 while no adjustment have been made to 2005 and 2006 figures.

Total number of firms to form primary sector data in 2003-2007 is 7103 in 2003 and 7308 in 2004-2006. 190 of them are traded in ISE, 733 of them are ranked in first and second 500 largest firms of ICI.

Totally 3874 firms in manufacturing sector are analyzed diversifies as: % 25 textile, % 15 food and % 10 metals. Total 1.411.826 of employment volume (as of 2006) created by 3874 firms in manufacturing industry employs 906.875 representing 64% of total.

When 2006 data are taken into account, total sales of main sectors are 466.872 Million YTL to represent 78% of GDP in 2006. Total net sales are diversified as; 54% manufacturing, 28% whole and retail commerce.

Also in 2006, total equity capital of main sector is 221.253 Million YTL. At the same year, equity capital is diversified as; 47% manufacturing sector, 16% real estate rentals, computers and business operations group. Communications and transportation group has 10 % of sector’s equity capital.

Classification of Sector Data

The main and sub manufacturing sector data in Kobirate database are classified according to EU economic activities classification system known as NACE codes and these codes are described in Kobirate database under main sectors.

Sector Identity

In Kobirate database, a sector identity is assigned to each sector. The data found in this identity in following order are; Total number of firms found in the sector, their legal status such as corporation, holding, limited, partnership, general partnership, single proprietorship, ordinary partnership, cooperative, foundation and public entity companies and their numbers.

Firm’s Competitive Position and Competitors Analyses

Competitive Strategy

To analyze the weakness and strength of a firm compared to its competitors is a key indicator to show a firm’s success in its operations which is a critical point in rating. For a business unit, the purpose of competitive strategy is to find the most successful defense position or influence towards competitive powers.

Determining the competitive power reveals firm’s weaknesses and strengths, revitalizes industrial position, determines the fields of maximum recycling with strategic changes and highlights the fields of maximum importance as opportunities and threats of industrial trends.

Competition Factors

The typical competitive factors are; price, quality, customer service and capability of delivering in time and in ordered quantity. The customer’s reasons to buy a product are; price, quality, image, shelf life, product popularity. The industry type may also be important, that is; the nature of competition changes according to industry’s global, mature, growing and widening structure.

For a company competing with price, the main factor beneath is the cost. The supplier with minimum cost will be the best in price lowering and sustaining its profit margin will be the winning part in price competition.

In case of quality competition, adequacy of employees or capacity of production facilities is crucial.

When the competition is on delivery side, wideness of distribution channels and production rapidness are important. Technology and health companies compete on inventions. The key element to success in these are invention and manufacturing products that clients demand, need and wish to buy.

There are many ways to compare competitors. The key element is to be comprehensive. In cost comparison, all operations must be considered. For example, many firms have energy, production, distribution, construction, employee, funding and tax charges. Managers always look forward to be operationally efficient which leads competitive advantage. Efficiency can be in production, distribution, marketing, purchase, management or finance. In other words, in every operation and location of a firm efficiency is sought after. Analysts must compare competition in identical fields.

According to Kobirate corporate credit rating methodology, by recording the last 3-5 years balance sheet and income statement data of the firm in Kobirate system, the competitive power of the firm is determined with all indicators data in our system automatically. With comparing the last 5 years data with the sectors’, it’s transferred to grades according to Kobirate methodology profile. The unavailable indicators are assessed by rating specialists and analysts to reach the final score.

Quantifying the Analyzing Techniques in Corporate Credit Rating

Corporate Governance, Management Structure and Quality, Shareholders Structure and Quality in Credit Rating

One of the most important fields to be assessed by rating specialists in a firm rating is corporate governance or type of management. Corporate governance comprises a series of relations among management, board of directors, shareholders and other stakeholders of a firm.

A firm with absolute integrity and executing corporate governance principles; has achieved the development in corporate culture, internal control systems, management structure and quality, shareholders structure and quality and business strategies. In firms with such integrity it is seen that cost of capital decreases while transaction volumes in capital markets and competitive powers increases.

In our country corporate governance principles have been established by CMB on the basis of country conditions with advises and suggestions of all related parties. With understanding the positive contribution of corporate governance principles to companies and country economics as well, many countries have started to establish their own corporate governance principles and the number of such countries has risen in recent years.

Corporate governance principles made applicable in our country have 4 main headings. These are shareholders, public disclosure and transparency, stakeholders and board of directors.


Shareholder’s rights and equal treatment principles take place therein. In this section, shareholders right to receive information and inspect, right to attend and vote at general meeting, right to receive dividend and minority rights are described in detail. Also keeping sound records about shareholders, free transfer and sale of shares including equal treatment principle to shareholders are described.

Public Disclosure and Transparency

In this section, determining public disclosure principles by developing the rules and policies to inform shareholders and obeying strictly to all is set. The main headings examined in this section are; periodical financial statements, balance sheets and reports including firm’s target.


Stakeholders in a firm consist of employees, creditors, clients, suppliers, non governmental organizations, trade unions, government and potential depositors to invest including shareholders. In this section principles of relations between stakeholders are set.

Board of Directors

This section contains functions, duties and responsibilities, activities, formation of Board of Directors and renumeration of board members, the committees set to help Board of Directors activities and principles of governing management relations.

According to the decision set by CMB at 07.02.2005, weights of sections in corporate governance compliance rating are as follows:

Shareholders 25 %

Public disclosure and transparency 25 %

Stakeholders 15 %

Board of directors 35 %

The rating results are decided to be disclosed according to all principles and separately according to headlines including their weights set above to public.

An important part of credit rating process in Kobirate is the corporate governance rating. Kobirate’s corporate governance rating is summarized in 3 main headings as stated below;

1- Scoring management structure and quality is resulted by rating specialists on site analyses.

2- Scoring shareholders structure and quality is resulted by rating specialists and analysts on site analyses.

3- In credit rating, the 3rd Section used in rating corporate governance is set according to CMB’s corporate governance regulation that analyses firm’s under 4 sections and scoring system is pertinent with capital market regulations.

Another feature of PERFECTRATE program is that; it is immediately possible to use main indicator grades set by supervisory authorities according to subject headings. Our system software also enables same transactions in other main sections.

Quantifying Financial Risk Analyses in Credit Rating

Financial ratios in financial risk analysis are the most important sources used by financial analysts, investors, executives and individuals interested in the firm, for measuring firm’s financial performance. According to the goal of the analysts, the computed ratio sets may tell much over firm’s financial situation. For example, lenders pay attention to liquidity, ability to discharge interest and fixed payments, financial leverage ratios and they need to measure firm’s ability to repay the loan together with interest. Higher liquidity and loan service ratios indicate that the firm has a higher capability for repayment of interest and fixed payments in time. On the other hand, financial executives focus on such ratios as well as on profitability ratios and interested in turnover ratios accordingly. Such latter ratios indicate how efficiently the firm’s assets are used. Further, expenses and sales are considered. On the other hand, for shareholders ; firm’s profitability, dividend ratios, P/E ratios are matter.

Financial risk analysis consists of procedures to establish relationship among items in the financial statements, measuring and commenting on them. Through analyzing of firm’s past and current performance, it is possible to make projections for the future. KOBIRATE makes and finalizes the Financial Risk Analysis under four main headlines which form an important part of credit rating process.

Quantifying the Business Risk Analysis in Credit Rating

Business risk is the one to which the firm is exposed due to sectoral changes, cyclical fluctuations, changes in customer preferences or technological innovations. Additionally, declining in market share due to increasing competition and/or reductions of barriers to get into the market are called as business risk.

Business Risk Analysis is divided into two or in specific cases three sub-group within itself:

A- Sectoral risk analysis and competition power of the sector,

B- Analysis of the firm’s competition strength

C- Activity analysis in some specific situations.

Sectoral Risk Analysis and Sector’s Competition Strength

The line of business in which firm operates and/or the risks involved in the sector are examined. Each sector has own specific conditions and these conditions consist of current and future risks as well. Therefore, all aspects of the sector are examined. For example ;

· Is the sector is expanding or contracting? What is the course of demand increase in this sector?

· How free is the entry and abandonment for the sector? If it is totally free, entry to the sector, can new players affect the competition strength of firm ?

· What is the projection of future demand of the product?

· Have the sales been stable until now?

· Is pricing flexible ? How is the firm influential in establishing the market price?

· Are the services and products for only domestic market or for a larger foreign market ? Who are the other players in foreign market? In which countries does the chance of competition exist ?

· What is the capital intensity?

· At what level are the research and development activities?

Firms operating in sectors involving higher risk must have more sound financial polices than the firms operating in more stable sectors. That’s why the potential risk involved in the sector is so important.

It is considered how much the goods or services produced by the firm are subject to seasonal fluctuations and cyclical developments. For example; tourism sector does not only rely on seasonal revenues but also suffers annual demand changes. How will be affected the product which totally depends on the construction sector if the construction sector is in a slowdown?

If the firm has power of setting the price level freely, then it’s power of pricing is higher than the market. It is also possible for brand products and if the firm has a monopolistic position in the market. Such position enables the firm to adjust its price for products considering both changes in demand and those in input cost.

Also entry of new products to the market will shape demand in mature industries. It is difficult to forecast what impact the new products will make on existing ones, however this should be absolutely considered in business analysis . Although the new products are not always successful in the market, they affect the supply and demand equilibrium. A new product may cause an existing product to go out of fashion for many reasons. More importantly, there may be a better product for the same price. Furthermore, new product may create a cheaper priced alternative or it may create a new demand and therefore may affect the supply and demand structure in the market too.

Firm’s Competition Strength

Competition strength of a firm will be measured by comparing similar scale rivals in the market. Especially firm’s market share is important. The firm’s size would be an advantage if it provides a scale economy, increases the purchasing power and creates a superiority in pricing. Where several leading firms have relatively high market shares in a sector, such an analysis may be valid. In manufacturing industry, competition strength may be featured by productivity rather than firm size. In such case, no matter how the firm is big. On the other hand, such factors as the fact that the machinery and equipment used in production are new or old, the effectiveness of production process may be more determinant about positioning the firms against its rivals.

Technology is a critical factor for competition strength. It is vital that the firms has a leading technology or is a monopoly in certain technologies. Technologic advantages enable the firm operating more effective and with lower costs rather than its rivals. It is observed that such firms invest consistently in research and development.

Operational Risk

It is a relatively new concept. In recent years, it is found out that several firms had financial loss because of ignoring operational risks. For sectors which technical capabilities are key to success, operational risk is viewed as a subtitle of business risk.

Internal process’ appropriateness and applicability are viewed to find out the operational risk. Risks emerging from external causes also are examined. Here as an example , following risks may be given: Sudden customer loss and consequential financial damages or losses that might result from fire, earthquake, terror, potential risk for human health and safety, or faults and failures in information and technological systems.

Obtaining Business Risk Analysis Data in Kobirate System

Obtaining Sectoral Outlook Data

There are 16 data recognized as indicator for sectoral outlook. 9 of them are derived from the sector’s Balance Sheet and Income Statement items.

The other 7 indicators are derived from Sectoral Reports, Sectoral Unions’s Reserch Reports and the other relevant releases.

Transmission of Quantified Data and Achieving Rating Grade in Corporate Credit Rating Main Module

Rating experts examine the analysis results of Financial Risk, Business Risk and Corporate Governance above mentioned. They transfer all data to credit rating module before the credit committee session. Hence all data should be compared with module symbols where Kobirate described the mathematical values and correlations between rating descriptions for short term.

In a credit rating operation, short term grades are achieved if the duration is for 1 year. More than 1 year, then long term grades will be obtained.

The rating report format includes the grade obtained through the Word pages specially developed by Kobirate and construction of indicators used to achieve the score. The final report score will be settled in Kobirate Credit Rating Committee and decisions are recorded in Resolution Register of Credit Committee.

In Credit Rating Result Form, it is possible to view a summary of all studies made by the rating expert . Upon presentation of the report , Credit Committee would make the final decision.

Should all the section titles reviewed be set forth by Regulators, they are applicable to Perfectrate software program